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View the article online at http://citywire.co.uk/wealth-manager/article/a245646

BAE bags carrier contract

by Joanne Wallen on Jan 30, 2003 at 16:31

BAE Systems may have won the battle for prime contractor status on the MoD's two new aircraft carriers, but as its share price suggests, it has by no means yet won the war.

The company today confirmed yesterday's speculation that it has been appointed prime contractor on the £10 billion project to build two new state-of-the-art aircraft carriers for the Royal Navy, beating French company and one-time favourite Thales to the post.

However, the deal - initially worth £2.9 billion - is that BAE (BA.) must agree to use Thales' designs (about a third of the work) and to cooperate with the French company to an extent and under terms that have yet to be thrashed out.

The MoD and BAE have been at loggerheads over the severe delays and cost overruns £5.5 billion worth of contracts for the Astute attack submarines and Nimrod surveillance aircraft.

Last month defence officials forced the company to tell investors its problems, a move which devastated its share price.

News that BAE will now have to work with Thales on the contract has led some industry watchers to suggest there could be a greater chance of delays and going over budget as a result.

Hence the reason perhaps that although the shares were boosted yesterday on rumours that BAE had won the bid, they fell again today and are currently down 4.75p at 113.5p, not far off their lowest levels for five years.

Citywire Verdict:

The Government's decision to give BAE the lead role on this contract is bizarre. The fact is that whether BAE or Thales won, British jobs were not at stake as the ships would be built here whatever the nationality of the management.

BAE's appalling record on the Astute and Nimrod contracts means it should have lost out. The fact that it has been entrusted with around two-thirds of the work may help keep it afloat, but the joint venture approach is bound to be messy.

Investors will also worry that the political intervention clouds the financial picture. With no sign that its operations are improving and with a growing pension scheme deficit investors are right to be unimpressed.

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